Suppose the rumor regarding the collapse of the Mexican peso con tinues. How does the central bank ensure that the exchange rate remains fixed?
a. The bank uses its dollar reserves to meet the excess demand for dollars.
b. The bank borrows dollars abroad.
c. The bank sells pesos
d. All of the above
e. Only a and b
By central bank I'm assuming the mean the U.S. central bank (although after re reading the question it probably doesn't really matter). So the Pesos value is declining because of the rumor, causing the exchange rate to rise. To lower the exchange rate the supply of dollars needs to increase to cause demand to decrease in turn lowering the exchange rate. So I'm saying the answer is e since the bank would not sell Pesos because that would cause the exchange rate to increase and a and b would lower the exchange rate. Is this right?
a. The bank uses its dollar reserves to meet the excess demand for dollars.
b. The bank borrows dollars abroad.
c. The bank sells pesos
d. All of the above
e. Only a and b
By central bank I'm assuming the mean the U.S. central bank (although after re reading the question it probably doesn't really matter). So the Pesos value is declining because of the rumor, causing the exchange rate to rise. To lower the exchange rate the supply of dollars needs to increase to cause demand to decrease in turn lowering the exchange rate. So I'm saying the answer is e since the bank would not sell Pesos because that would cause the exchange rate to increase and a and b would lower the exchange rate. Is this right?